TSP vs IRA: What Federal Employees Should Know When Deciding Whether to Move Their Retirement Savings

As a federal employee, you have access to the Thrift Savings Plan (TSP), and you may also be eligible to contribute to an Individual Retirement Account (IRA). Understanding whether you should use a TSP, an IRA, or both can be difficult. Each account offers distinct benefits, limitations, and investment options to consider when planning for retirement.

What Is the TSP?

The Thrift Savings Plan (TSP) is a tax-advantaged retirement savings and investment plan available to federal employees and members of the uniformed services. It functions similarly to a private-sector 401(k), allowing employees to contribute through payroll deductions and invest their savings in a selection of TSP funds.

For employees covered under FERS, the TSP works alongside your FERS pension and Social Security to form the three primary components of your retirement income.

What Is an IRA?

An Individual Retirement Account (IRA) is a personal retirement savings account that offers tax advantages and a wider range of investment options than many employer-sponsored retirement plans.

Individuals with earned income are generally eligible to contribute to an IRA, and certain spouses may also be eligible to contribute through a spousal IRA. Contributions for a given tax year can generally be made between January 1 and the tax-filing deadline of the following year.

Unlike workplace retirement plans such as a 401(k) or 403(b), an IRA does not require an employer sponsor. You can typically open and manage an IRA through a brokerage firm of your choice.

What Are the Similarities Between a TSP and an IRA?

Both the TSP and IRAs provide tax-advantaged ways to save for retirement. Depending on the account, you may choose between a Traditional option, which generally provides tax-deferred growth, or a Roth option, which may provide tax-free qualified withdrawals.
With a Traditional TSP or IRA, contributions may receive favorable tax treatment, and withdrawals are generally subject to ordinary income tax.
With a Roth TSP or Roth IRA, you contribute after-tax money, and qualified withdrawals are generally tax-free. Roth IRAs also have their own five-year rules and qualification requirements.
With both types of accounts, withdrawing money before age 59½ may result in income taxes and/or an early-withdrawal penalty, although exceptions may apply.
Both accounts are subject to required minimum distribution (RMD) rules in certain circumstances, although the rules are not exactly the same for TSPs and IRAs.

What Are the Pros and Cons of a TSP?

Pros of a TSP

TSP loans may be available to eligible participants.
Higher contribution limits than an IRA.
Investment fees tend to be among the lowest of many retirement plans.
Automatic payroll deductions make contributing convenient and consistent.
There are no income limitations for making regular TSP contributions.
FERS employees may receive agency/service contributions, depending on their retirement system and employment status.
Upon separation from employment at age 55+, IRS early withdrawal penalties are waived. (for Special Provisions, age 50+ IRS early withdrawal penalties are also waived)

Cons of a TSP

You have limited control over the investment options and fees because you are restricted to the funds offered through the TSP.
Certain loans and withdrawals may require spousal consent depending on your circumstances.
Contributions are generally made through your paycheck while you are employed by the federal government.
Investment choices are limited to the funds available within the TSP.
Beneficiary and withdrawal rules can create additional tax considerations for surviving spouses and other beneficiaries.
You generally cannot target withdrawals to individual TSP funds based on recent market performance.
Changes to your investment allocation apply to your TSP account as a whole rather than allowing you to separately manage the allocation of your Traditional and Roth TSP balances.
Interfund transfers within the TSP are limited to 2, plus G-Fund per month.
If you leave federal service, you generally cannot continue making new contributions to your TSP through payroll deductions, although you can typically leave your existing money in the plan.

What Are the Pros and Cons of an IRA?

Pros of an IRA

You can contribute to an IRA independently of your employer, as long as you meet the applicable eligibility and income requirements.
IRAs typically offer a much wider range of investment options than the TSP, including a broader selection of mutual funds, ETFs, and other investments depending on the brokerage.
You can open an IRA at many brokerage firms and have greater control over how the account is invested.
An IRA can provide additional flexibility in how you manage and invest your retirement savings.
You can contribute to an IRA using income from a variety of sources.

Cons of an IRA

Contribution limits are significantly lower than those of the TSP.
You generally cannot take a loan against an IRA.
There are no employer matching contributions.
Roth IRA contributions are subject to income eligibility limits.

Can You Use Both a TSP and an IRA?

As a federal employee, you may have the opportunity to use both a TSP and an IRA as part of your retirement strategy. These accounts do not necessarily have to be an either-or decision. Using both can allow you to take advantage of the strengths of each account.

Frequently Asked Questions About TSPs and IRAs

Should I Have a TSP or an IRA?

You don’t necessarily have to choose between the two. Many federal employees use both to take advantage of the TSP’s higher contribution limits and potential government matching while using an IRA for additional retirement savings and investment flexibility.

What Happens to My TSP if I Leave Federal Service?

Leaving federal service does not mean you have to immediately move your TSP. You can generally leave your existing balance in the plan, but you will no longer be able to make new employee contributions through federal payroll.

Can I Roll My TSP Into an IRA?

Yes. Eligible TSP funds can generally be rolled into an IRA. However, the tax treatment can differ depending on whether you are rolling over Traditional or Roth funds, so it’s important to understand the rules before completing a rollover.

Should I Move My TSP Into an IRA When I Retire?

Not necessarily. A rollover may make sense for some retirees, but keeping your money in the TSP may also have advantages. Your investment goals, fees, tax situation, withdrawal needs, and overall retirement strategy should all be considered before making a decision.

Learn More at a Free Federal Benefits Workshop

At Government Benefit Educators (GBE), our mission is to help federal employees understand the benefits they've earned so they can make more informed retirement decisions.

Our free Federal Benefits Workshops cover topics including:

Attendees also have the opportunity to request a complimentary Federal Benefits Analysis, which provides a personalized look at how your federal benefits work together based on your own retirement goals and circumstances.

Rather than focusing on just one benefit, we help federal employees understand how ALL the pieces fit together so they can prepare for retirement with greater confidence.

To learn more, connect with one of our network advisors today, or join one of our FREE Federal Benefit Workshops.